Credit Score
Components

Understanding your credit score components and the formula used by Fair
Isaac and Company (Fair Isaac), the company who institutionalized FICO
scores, has been a mystery to most consumers.

A credit score is a numerical depiction based on statistical data,
available on someone’s credit files, of whether a person is worthy of
getting credit or not. Unfortunately, credit scores are almost a ruling
element in everyday life now. So many things are based on your credit
scores. Getting a mortgage, loans from banks, even employment in some
cases, are dependent on where a person’s credit score lies.

FICO scores are a measure of credit risk, and by far, the most used
credit scores in the world today. They have been shown to be predictive
of any risk involved, and have allowed the cost of providing credit to
go down and be more widely available to the average person. These scores are
calculated based on a number of factors, each of which varies in its
importance.

What are Your
Credit Score Components?

Payment
History (35%) - This is one of the most important credit
score components to calculate your score. Fair Isaac has disclosed that
this makes up at least 35% of your credit score. How quickly or how
late you make your bill payments, be it your mortgage, credit card,
bank loan etc determines this part of the score. For someone who is
continuously paying late, depending on how long the respective account
has been open, his/her FICO score can actually drop by 100 points. On
the other hand, making your payments on time will improve your score
slowly but surely.

Credit
Utilization (30%)
- Fair Isaac has also revealed that 30% of your credit score is based
on this credit score component. This refers to how much you are
actually in debt as opposed to what your credit limits are. The
sensible thing to do is always keep your debts to a minimum and pay off
as soon as you can. Credit cards that are maxed out drastically reduce
your credit score. A good rule of thumb is to only spend 30% of what
your available credit is.

Length
of Time (15%) - The amount of time that your credit has
been established is also one of the important credit score components
that you should monitor. It is important that you think
carefully before closing any
accounts. While it is wise to cancel any extra credit cards that you
don’t use, don’t cancel those whose history is long and has been
managed
well. This only reflects positively on your FICO score.

Types
of Credit (10%) - FICO also calculates credit scores
based on the types of credit obtained and used. This is next in the
list of most important components. If someone has a good
history of managing a range of credit types, for example consumer
finance, installments etc, it raises their FICO scores.

New
Credit (10%) - Another criteria used to determine your
FICO score is a recent search of the amount of credit obtained. This
means that people shouldn’t apply for multiple credit cards all at the
same time, or open too many retail store accounts. This is viewed as an
extremely risky move which can drop your credit scores by a significant
number of points. In fact, if you are thinking about getting a loan
concerning a big purchase in the near future, the best possible thing
for you to do is avoid any other credit application for at least 18
months prior to this big loan.